HBUD FY25 Budget: Buried on Passage

HBUD: The Markup of the Concurrent Resolution on the Budget for Fiscal Year 2025, March 7, 2024

Members of the Majority have been posting on X that this budget will end the scourge of debt held by this nation. Let us first examine whether this is true. Majority and Minority staff should be familiar with these data sources, so they can verify this information.

According to IRS data for calendar year 2021, 15.4 million, or 10%  of the tax returns filed accounted for half of all adjusted gross income reported, or $7.7 Trillion. The income floor for this percentile is $169,800. At this level and above, wages and salaries account for $3.6 Trillion. The remaining $4.1 Trillion is from non-wage income, including dividends and capital gains.

The 90/10 breakpoint is important in discussing debt ownership, because at this level, according to the 2020 Federal Reserve Survey of Consumer Finance. In general, the top 10% of households hold 54% of value held in transaction accounts and long-term investments (Certificates of Deposit, Retirement Accounts, Life Insurance) and 77.4% of value held in Bonds, Pooled Investment Funds, Savings Bonds and Other Managed Assets.  These are the kinds of assets that hold federal debt securities - the scourge members were referring to.

These are the most recent holdings, according to the March 2024 Treasury Bulletin tables OFS-1 and OFS-2 and SWFI. December 2023 data not yet fully allocated ($1 trillion).

Asset Owner	Amount
Federal Reserve Banks and depository institutions (transaction accounts and certificates of deposit)	$6.7 trillion
Pension funds, insurance companies	$1.7 trillion
Mutual funds, savings bonds, individual investors and non-governmental foreign accounts - including $1.4 trillion held in tax shelters (latest data)	$11.3 trillion
Overseas official accounts, which back trade	$3.7 trillion
Social Security Trust Fund	$2.9 trillion
State and local accounts (non-pension)	$1.6 trillion

Which of these asset owners holds the whip that is scourging us? Note that $8.7 trillion or more is held by the top 10% of income earners.

The other side of the ledger is the responsibility for paying this debt off, in the unlikely scenario that someone would have to write a check.  The ability to accumulate this debt coincided with the enactment of the 16th Amendment and the creation of the Federal Reserve System. In other words, the ability to create a stable money supply and create financial assets based on the national debt coincides with the establishment of progressive income taxes, especially during and after World War II. 

Put another way, which is the correct way, $34 trillion of Public Debt is backed by $2.2 trillion of annual personal income tax payments. $1.6 trillion of these receipts are paid by the top 10% of filers (who own $13.3 trillion of Treasury Securities). For each dollar of income tax paid, $15.45 is owed in debt. The top 10%, therefore, owe $24.7 trillion. The next $4.6 trillion is owed by the next 23 million taxpayers. The remaining $4 trillion are owed by the next 35% of the population. Together, these households hold $6 trillion of debt assets.

The bottom 40% pay no income tax and owe none of the national debt because they have no ability to pay it. Nor should they have to. They have been paying Social Security payroll taxes, which create an asset for them ($2.9 trillion) and a debt to income tax payers. As it is, 80% of retirees have no significant additional income.

This demonstrates that the national debt creates wealth because it leverages the creation of the assets which holding the national debt guarantees. There is a direct correlation between the booming market and the budget deficit. The question is whether the income tax paid to debt owed ratio is sustainable. It should be until there is an alternative reserve currency, however neither the Euro or the Yuan are backed directly by progressive income taxes. The only immediate threat is gamesmanship by the Majority having to do with Debt Limit legislation.

Cutting the debt is likely a good idea, although cutting it out can only be done safely when capitalism has been replaced by a cooperative economy where employees rather than investors and bankers control most financial instruments (stocks, mortgage and consumer debt) and consumption. When President’s Jackson and Eisenhower through Johnson paid down the national debt previously, financial hardship was created because all assets in the economy were speculative. When speculation is rampant, such as during the 1920s and 2000s, not even backing by the debt can keep the economy from collapsing. The risk today is of the same order, taxes are not producing adequate backing for the economy.

Cutting spending sounds good until you actually try it. Government spending buys food, shelter and Internet for government employees, government and non-government retirees and government contractors. This consumption funds the income and consumption for the private economy, as well as investment in plant and equipment to produce such goods.

This leaves taxation as the only variable available to control the size of the debt. The Laffer Curve illustrates these dynamics. Prior to the Kennedy-Johnson tax cuts, revenues were at what I call the Laffer Maximum - that is, they were high enough so that the CEO and investor class had no incentive to cut labor costs and redirect the money to themselves. The government would simply tax such savings away. 

The Reagan tax cuts brought inflation under control - because CEOs had incentives to cut costs - and to leverage the creation of financial assets by increased deficits.  The tax reform of 1986, which is the foundation of the current rate structure, went too far, leading to speculation in the Savings and Loan Market and the associated slowdown. These rates were below the Laffer Optimum, which is the point of maximum revenue generation. 

The Tax Policy Center cited the 60% range as that level. During the Bush-Clinton years, tax rates were increased in such a way as to increase government revenue. Federal Reserve Chairman Greenspan cautioned against reducing the deficit for its effect on leveraging capitalism, although there was little danger of getting to that level of austerity in the immediate future. The capital gains tax cuts under both Clinton and Bush pushed us into a series of booms and busts in technology and housing finance, culminating in the Great Recession. When Obama allowed tax rates on the wealthy to return to Clinton era levels for high income earners, the economy began to grow, largely because tax rates were low enough to prevent wage concessions.

The Trump-Ryan-Brady cuts began to slow the economy prior to the pandemic, meaning they were much below the Laffer Optimum - with labor cost cuts and increased speculation hurting growth. The Pandemic hid this problem. The Trump and Biden tax benefits to working families have rebalanced the equation temporarily. The booming stock market is a danger signal.

This problem will take care of itself next year, as the tax cuts that this budget seeks to preserve are sunsetting, while the increased child tax cuts enacted by the House and stalled in the Senate will also improve the economy for households and the productive (rather than the speculative) sector.

My question to the Majority is whether your members and staff know this information and are deliberately misleading the voters or are entirely in the dark. I am not sure which is worse.

This Budget Resolution is beyond Dead on Arrival. It is Buried on Passage. It will not make a dent in the news of the day.

The motivation for keeping the Trump Cuts alive is obvious. It is an attempt to bring Republican donors back to the Majority Party. Since the Insurrection, donations have not only fallen flat, they have all but disappeared. As long as the Party is tainted with Trumpism, not even preservation of these undesirable tax cuts will save it. Hopefully, the donor class is also aware of the underlying economics, which demands higher tax rates to function correctly.